Quarterly Report September 2018

18 October 2018

South32 Limited

(Incorporated in Australia under the Corporations Act 2001)

(ACN 093 732 597)

ASX / LSE / JSE Share Code: S32ISIN: AU000000S320

south32.net

South32 Limited

Quarterly Report September 2018

"Annual production guidance is maintained for all of our operations with Australia Manganese achieving another quarterly record and total manganese ore production increasing by eight per cent. Illawarra Metallurgical Coal also enjoyed a strong start to the year as an improvement in longwall productivity underpinned an annualised production rate of 7.6Mt in the quarter.

"We finished the period with a net cash balance of US$679 million and additional funds in our manganese joint venture as our key commodity markets benefitted from robust demand and pricing. This strong financial position enabled us to acquire Arizona Mining and Eagle Downs, and to continue our US$1 billion capital management program.

"We continued to make excellent progress in reshaping our portfolio. In addition to the two acquisitions, we continued to advance our 18 greenfield exploration projects and commenced the process to broaden and transform the ownership of South Africa Energy Coal."

Graham Kerr, South32 CEO

Corporate Update

Worsley Alumina

(86% share)

Worsley Alumina hydrate production increased by 5% (or 48kt) to 959kt in the September 2018 quarter while calcined alumina production decreased by 13% (or 127kt) to 854kt as further maintenance was undertaken and the refinery re-established a substantial hydrate inventory position. We took advantage of current market dynamics and agreed multiple contracts, at alumina equivalent rates, to sell opportunistic volumes of hydrate for shipment during the December 2018 quarter. Additional calciner maintenance is scheduled for the March 2019 quarter and FY19 production guidance remains unchanged at 3,965kt.

The average realised price for alumina sales in the September 2018 quarter is expected to reflect a moderate discount to the Platts Alumina Index (PAX)10 on a volume weighted M-1 basis. This discount reflects the elevated alumina to aluminium price ratio in the spot market and the structure of specific Mozal Aluminium supply contracts that are linked to the LME aluminium price, which in this case reduces the price paid by our smelter.

Hillside Aluminium

(100%)

Hillside Aluminium saleable production increased by 1% (or 1kt) to 180kt in the September 2018 quarter as the smelter continued to test its maximum technical capacity. FY19 production guidance remains unchanged at 720kt. Notwithstanding the smelter's continued strong operating performance, higher prices for alumina and aluminium price-linked power, and still elevated prices for pitch and coke continue to impact its cost base.

Mozal Aluminium

(47.1% share)

Mozal Aluminium saleable production increased by 1% (or 1kt) to 68kt in the September 2018 quarter as the smelter continued to test its maximum technical capacity. The US$18M (South32 share) AP3XLE energy efficiency project commenced the roll out of its pot relining program ahead of schedule during the September 2018 quarter. The project is expected to deliver a circa 5% (or 10kt pa) increase in annual production for no associated increase in power consumption, with the full benefit expected to be realised by FY24. FY19 production guidance remains unchanged at 269kt.

Notwithstanding the smelters continued strong operating performance, higher prices for alumina and still elevated prices for pitch and coke continue to impact its cost base. The smelter sources alumina from our Worsley Alumina refinery with approximately 50% of its requirements priced as a percentage of the LME aluminium index, providing it with some cost relief at current alumina prices.

Brazil Alumina

(36% share)

Brazil Alumina saleable production decreased by 3% (or 9kt) to 305kt in the September 2018 quarter as unplanned maintenance and power outages impacted performance. FY19 production guidance remains unchanged at 1,355kt with the refinery expected to creep production over the remainder of the year following the completion of the De-bottlenecking Phase One project in March 2018.

South Africa Energy Coal

(100%)

South Africa Energy Coal saleable production decreased by 13% (or 937kt) to 6.2Mt in the September 2018 quarter. Export production was impacted by an incident that caused damage to the dragline at Klipspruit in August 2018, while domestic production declined in response to lower demand, despite the commencement of a new contract to sell additional lower quality stockpiled product in the June 2018 quarter.

The extended dragline outage at Klipspruit which will reduce export coal production by approximately 2Mt, was already included in annual guidance of 29Mt (17.5Mt domestic, 11.5Mt Export). The incident has been confirmed as an insurable event and we expect to recover certain losses. We are currently working with our insurers on a schedule for the dragline's repair and recommissioning.

Illawarra Metallurgical Coal

(100%)

Illawarra Metallurgical Coal saleable production increased by 54% (or 670kt) to 1.9Mt in the September 2018 quarter as the Appin and Dendrobium longwalls performed strongly following moves in the June 2018 quarter. Notwithstanding the improvement in longwall productivity at Appin, an uplift in development rates is required to sustain the operation of two longwalls in parallel from H2 FY20. We also reached agreement with the employees covered by the Appin Deputies Enterprise Agreement (EA), following agreement of a new Dendrobium Deputies EA in the June 2018 quarter. We continue to renegotiate several other labour agreements at Illawarra Metallurgical Coal and this process is being closely managed.

Production guidance remains unchanged at 6.1Mt with development rates to become an even greater focus and two longwall moves to be completed over the remainder of FY19.

Australia Manganese

(60% share)

Australia Manganese achieved record ore performance in the September 2018 quarter, increasing saleable ore production by 8% (or 67kwmt) to 932kwmt. The primary circuit continued to achieve high utilisation rates while the Premium Concentrate Ore (PC02) circuit operated at approximately 120% of its design capacity, contributing 9% of total production in the quarter. FY19 production guidance remains unchanged at 3,350kwmt with preparation underway for the upcoming wet season.

Manganese alloy saleable production decreased by 2% (or 1kt) to 41kt in the September 2018 quarter.

South Africa Manganese

(60% share)

South Africa Manganese saleable ore production increased by 8% (or 38kwmt) to 515kwmt in the September 2018 quarter as production ramped up at Wessels following a planned shutdown that commenced in May 2018. We continued to take advantage of favourable market conditions by selling lower quality secondary product and utilising higher cost trucking. FY19 production guidance remains unchanged at 2,050kwmt.

Manganese alloy saleable production decreased by 50% (or 11kt) to 11kt in the September 2018 quarter as a planned furnace shutdown was completed during the quarter.

Cerro Matoso

(99.9% share)

Cerro Matoso payable nickel production decreased by 5% (or 0.6kt) to 10.7kt in the September 2018 quarter as record ore throughput was achieved with an increase in lower grade stockpiled ore feed.

On 24 September, we announced that the Constitutional Court of Colombia had issued its final ruling on our application to annul its decision regarding the alleged health and environmental impacts of our Cerro Matoso operation on the surrounding communities. The Court annulled those orders requiring Cerro Matoso to pay direct financial compensatory damages to community members and establish an ethnic development fund. The orders requiring Cerro Matoso to provide ongoing health care to community members alleging health impacts, and to submit to a new consultative environmental licensing process, were not annulled.

Production has not been impacted by the decision handed down by the Court and FY19 guidance remains unchanged at 40.5kt.

Cannington

(100% share)

Cannington payable zinc equivalent9 production decreased by 16% (or 9.2kt) to 49.7kt in the September 2018 quarter following the extraction of a high grade sequence of stopes in the prior quarter. Processed silver, lead and zinc grades met our expectations and guidance remains unchanged for FY19 at 186g/t, 5.1% and 3.1%, respectively. Mill throughput was largely unchanged with greater predictability and stability achieved in the underground mine.

The decrease in quarterly sales reflects a change to the shipping schedule requested by a customer. FY19 zinc equivalent9  production guidance of 188.1kt (silver 11,750koz, lead 98.0kt and zinc 51.0kt) remains unchanged.

Notes:

1. Refer to exchange release on 13 August 2018 "South32 completes acquisition of Arizona Mining".

2. The information in this release that relates to estimates of Mineral Resources for the Hermosa project are foreign estimates under ASX Listing Rules and reference should be made to the clarifying statement on Mineral Resources in the market announcement 'South32 to acquire Arizona Mining in agreed all cash offer' dated 18 June 2018, in accordance with ASX Listing Rule 5.12. South32 is not in possession of any new information or data relating to the foreign estimate that materially impacts on the reliability of the estimates. South32 confirms that the information contained in the clarifying statement in the 18 June 2018 market announcement continues to apply and has not materially changed. The estimates of Mineral Resources are not reported in accordance with the JORC Code. Competent Persons have not done sufficient work to classify the foreign estimates as Mineral Resources in accordance with JORC Code. It is uncertain that following evaluation and further exploration that the foreign estimates will be able to be reported as Mineral Resources or Ore Reserves in accordance with the JORC Code.

3. Refer to media release on 14 September 2018 "South32 completes acquisition of 50% interest in Eagle Downs and assumes operatorship".

4. Net Cash number is unaudited and should not be considered as an indication of or alternative to an IFRS measure of profitability, financial performance or liquidity.

5. Net distributions from equity accounted investments includes net debt movements and dividends, which are unaudited and should not be considered as an indication of or alternative to an IFRS measure of profitability, financial performance or liquidity.

6. The Colombian corporate tax rate was 40% until 31 December 2017. The Mozambique operations are subject to a royalty on revenues instead of income tax.

7. 8% of South Africa Energy Coal is owned by a Broad-Based Black Economic Empowerment (B-BBEE) consortium. The interests owned by the B-BBEE consortium were acquired using vendor finance, with the loans repayable to South32 via distributions attributable to these parties, pro rata to their share in South Africa Energy Coal. Until these loans are repaid, South32's interest in South Africa Energy Coal is accounted at 100%.

8. Consistent with the presentation of South32's segment information, South Africa Manganese ore production and sales have been reported at 60%. The Group's financial statements will continue to reflect a 54.6% interest in South Africa Manganese ore.

9. Payable Zinc Equivalent (kt) is calculated by aggregating revenues from payable silver, lead and zinc, and dividing the total revenue by the price of zinc. FY18 realised prices for zinc (US$3,185/t), lead (US$2,463/t) and silver (US$16.6/oz) have been used for FY18 and FY19e. Zinc equivalent is used to compare Cannington with the recently acquired Hermosa project which is currently reported in zinc equivalent terms.

10. The quarterly sales volume weighted average of the Platts Alumina Index (PAX) (FOB Australia) on the basis of a one month lag to published pricing (Month minus one or "M-1") was US$499/t in the September 2018 quarter.

11. The following abbreviations have been used throughout this report: grams per tonne (g/t); tonnes (t); thousand tonnes (kt); thousand tonnes per annum (ktpa); million tonnes (Mt); million tonnes per annum (Mtpa); thousand ounces (koz); million ounces (Moz); thousand wet metric tonnes (kwmt); million wet metric tonnes (Mwmt); million wet metric tonnes per annum (Mwmt pa); thousand dry metric tonnes (kdmt).

Operating Performance

Forward-looking statements

This release contains forward-looking statements, including statements about trends in commodity prices and currency exchange rates; demand for commodities; production forecasts; plans, strategies and objectives of management; capital costs and scheduling; operating costs; anticipated productive lives of projects, mines and facilities; and provisions and contingent liabilities. These forward-looking statements reflect expectations at the date of this release, however they are not guarantees or predictions of future performance. They involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results to differ materially from those expressed in the statements contained in this release. Readers are cautioned not to put undue reliance on forward-looking statements. Except as required by applicable laws or regulations, the South32 Group does not undertake to publicly update or review any forward-looking statements, whether as a result of new information or future events. Past performance cannot be relied on as a guide to future performance.

Further information

18 October 2018JSE Sponsor: UBS South Africa (Pty) Ltd